CHAPTER 1
Guaranteed Money
Running out of money is worse than death.
— Carol Fleck, AARP
If your retirement assets are in equities or variable investments such as stocks, bonds, real estate investment trusts (REITs), mutual funds, variable annuities, and precious metals such as gold, then they are all subject to some unique risks within their asset classes, and may be subject to overall market risk.
This is what we call the maybe money (market risk) portion of your portfolio: maybe you'll make money, maybe you won't, with no guarantees. When you retire, will your money be there when you need it the most?
When talking with your advisor, if you mention that you're concerned about a market correction and losing money, the first thing he's probably going to want to do is set up a meeting to go over your financial situation and recommend reallocating your assets to diversify into more conservative investments that may help preserve your assets from market volatility. The analogy we use is that's no different from walking into a casino and saying, "I'm going to diversify — a little poker, some blackjack, and then on to the slot machines." If your money is in equities or variable investments, then all your money is still at risk from market volatility.
In 2008, if you were a conservative investor invested in equities, it was still possible to lose money. Obviously, it's your money, so you have to feel comfortable in how your hard-earned money is invested, but at least some of it needs to be safe and be able to generate an income in retirement. Prepare yourself for the day you retire. You don't want to outlive your money. That's why it's so important to consider how much money you will need in retirement. What are your plans once you retire? Will you need to pay for medical insurance? Will you need long-term care? How will inflation and taxes affect your retirement?
We believe that taxes aren't going down anytime soon! If you want to see a real eye-opener, visit the US Debt Clock website (www.usdebtclock.org). There you'll see how fast the United States debt is growing in real time. As of September 7, 2016, the official debt of the United States was 19.5 trillion dollars ($19,510,700,350,985).
In a few years, you'll wish taxes were at the level they are today.
The IRS already has a plan for your retirement accounts. They have a good indication based on your tax returns or audits how much money you're going to be taxed on those accounts. There are a couple of things you can do:
1. Have an experienced financial professional help you toward assessing your retirement goals.
2. Use the IRS rules when it's possible to legally reduce your taxation.
Generally, if you have a pension it could be taxed by both the federal and state government, along with your retirement accounts that may be taxed at some point.
Then your Social Security may be subject to taxation under current IRS rules. On top of all that, if you work and collect Social Security between the ages of 62 and up to the year of your FRA you could be penalized and lose 50% of your benefits.
When it's time to start taking a distribution from your nest egg, what's your plan to avoid paying more in taxes than you should?
When you're in or near retirement, you should think seriously about being in preservation mode (protecting what you've acquired). If you have most or all of your money in variable investments, the ones we previously mentioned, where's your safe money? Another analogy is if you were at a poker table in Las Vegas, and a majority of your retirement money was sitting in the pot, and the dealer asks if you are in or out. Would you just say, "Whatever. If I win, that's fine, and if I lose, that's okay too"? You've worked far too long and hard to try to hit a home run in the ninth inning of the baseball game only to strike out with your retirement savings when you're in or near retirement, hoping the stock market is going to cooperate with your retirement goals. Diversify by using a safe money alternative as a way to provide an optional lifetime of income for you and your spouse rather than losing your retirement assets from a market decline.
So you're going to need two things in retirement: safety and income. That's why it's critical to provide a safer income for life for you and your spouse. When you're in or near retirement, you cannot afford to have over half of your money in equities when we're in a declining or bear market. This could devastate your retirement savings, causing you to run out of money. If you're no longer employed with a steady stream of income to replace the losses, it could be difficult to maintain your lifestyle in retirement. If you lose 50% of your investment in a market decline like the one in 2008, you would need a 100% gain just to break even, and this may take you a while to just get back to where you were.
If your advisor has put most of your assets in equities and very little in cash, you should be wondering why. Do you think it may be because they are more concerned about being on your payroll and collecting their fees than on you outliving your money in retirement? Ask yourself, What's their agenda if they keep most of your hard-earned money at risk in the market? Obviously, your advisor gets paid whether you make money or not as long as your money is at risk in the market. If you move any portion of your investments to cash or money market accounts for a safer alternative, they will stop getting paid on that money.
Why wouldn't you consider an income for life, guaranteed and insured? Are you aware that no commission or fees are taken out of a guaranteed money account to pay an advisor? If you were to use the Rule of 100, when you're 60 years old, then 60% of your money should be invested in guaranteed money or safer money alternatives, and only 40% should be in maybe money or variable investments in the market where it's all at risk.
When you're younger and building your career, you may be able to take more risk with your assets because you may have decades to recover from any major losses, and time is thought to be on your side. If you're in or near retirement, you should be preserving your retirement assets with a safer option as a portion of your portfolio because the older you get, the less time you have to recover from a market correction, and time is generally not on your side.
Think seriously about protecting your principal with guaranteed money to generate a lifetime income stream as a portion of your portfolio designed to last you in and through your retirement years. A few years ago, many Ford and GM employees converted their lump-sum buyouts into their own personal lifetime stream of income. Let's look at some safe money alternatives.
Safe Money Options
Banks or Credit Unions
Your deposit with a bank is guaranteed by the Federal Deposit Insurance Corporation (FDIC). Credit unions are guaranteed by the National Credit Union Administration (NCUA). These types of financial institutions offer fixed interest rates on savings and certificates of deposit (CDs), but an early withdrawal from your CD can result in a penalty prior to its maturity date if their guidelines are not adhered to.
At the time of this book's publication, the interest rates on CDs and savings account were very low. Because of the low interest rates, you as an investor could be exposed to inflation risk. For example, say the banks were offering .90% for CDs. The Rule of 72 says to take 72 and divide it by the interest rate, which tells you how long it would take you to double your money. At .90% it would take you approximately eighty years to double your money. No one in or near retirement is planning on living another eighty years.
The whopping one tenth of one percent on savings accounts would take you 720 years to double your investment. If you apply for a credit card, the interest rates are going to be in the double digits. So who's being taken advantage of here? It's clearly the person with a CD or savings account along with the person applying for the credit card. It's not the responsibility of the bank or credit union to help you keep up with inflation. They care less if you're getting a negative return with inflation on your deposit. A good place to learn about the most recent bank rates in the United States is the Bankrate website at http://www.bankrate.com.
United States Treasury Securities
When you purchase US Treasury securities, you presumably have minimal default risk, but these guaranteed investments can also have a very low yield, whether it's yield to maturity or yield to call. They are government debt instruments issued by the United States Department of the Treasury to finance the national debt of the United States.
T-bills, T-notes, and T-bonds are often referred to simply as treasuries. Since 2012, the management of government debt has been arranged by the Bureau of the Fiscal Service, succeeding the Bureau of the Public Debt.
Generally speaking, there are four types of marketable US treasuries: treasury bills, treasury notes, treasury bonds, and treasury inflation-protected securities (TIPS). Many of these securities can be purchased directly from the US Treasury on their website: http://www.treasurydirect.gov.
Fixed and Fixed-Indexed Annuities
The United States experienced a devastating recession from September 2007 to June of 2009. Retirement accounts were decimated to the tune of $2.4 trillion. That's right — it's not a million or a billion but a trillion.
If these investors had used fixed or fixed-indexed annuities with a portion of their portfolios, then they may have had these alternatives:
• No loss of principal from market declines
• Growth potential that can be tax deferred
• Allocation options to participate in market-linked indexes
• Various choices for crediting methods
• Income flexibility, including an optional rider for a lifetime of income
• Optional enhanced death benefit
• Probate avoidance
• Guaranteed and insured
Some policies have the option to help with health care costs such as in-home care, adult day care, assisted living, and nursing home care.
Annuity contracts are not invested in an index. You are paid off the performance of an index. If the index is up, you make money. If the index is declining, you won't lose a dime of your principal from the volatility of the market. You can't say the same for your investments in the market.
History of Annuities
Domitius Ulpians is credited with being the world's first annuity dealer in Ancient Rome, circa AD 211.
Annuities date back to the Roman era. They were issued to soldiers as a way of thanking them for their loyal service.
Benjamin Franklin passed away on April 17, 1790. He supported the concept of annuities, and in his will left annuities to the city of Philadelphia and Boston. After owning the annuity over two hundred years, the city officials of Boston in 1993 voted to take the lump-sum cash payment. To this day, Philadelphia still owns its annuity.
Civil War soldiers were given annuities instead of land. President Lincoln supported this program prior to his death to assist injured or disabled soldiers. After the Civil War, during President Grant's administration, he withdrew many of the annuities, saying that the benefits outweighed their contributions to the war effort. The former veterans pursued legal action, and a few years later, the Supreme Court restored the annuities.
Today annuities are issued by insurance companies and state lotteries. At one time, banks were allowed to issue annuities, and many of them offered their own forms of annuities. During the financial turmoil of 1919 and just after the end of World War II, individual states began setting up guidelines making it illegal for banks to issue annuities unless the annuity was issued by an insurance company. Today each state has its own rules, statues, or administrative codes, and corresponding administrator or commissioner to help govern the sale of annuities in their state. This type of government oversight helps improve the guidelines and standards of annuity sales in each state. This sets the new rules for the safety of annuities today.
During the Great Depression, life insurance companies that issued annuities considered their standards as being safe and secure. People's financial futures were preserved because of the safety that annuities provided along with the financial strength and claim-spaying ability of the issuing insurance company.
Annuities have survived wars, the Great Depression, and recessions, including the devastating market declines of 2000 and 2008. Fixed or fixed-indexed annuities have never lost a dime of investors' principal due to market volatility.
CHAPTER 2
Rule of 100
A technique financial professionals use to assist you with your requirement goals is called the Rule of 100, wherein your retirement assets are allocated between guaranteed money (safer money) and maybe money (market risk).
We use this rule as a simple way to help us determine the correct diversification of assets for the person in or near retirement. We take into consideration your time horizon, liquidity needs, goals, and risk tolerance. We use two retirement income strategies to apply the Rule of 100. Asset diversification in equities does not assure a better return on your investment and cannot eliminate negative returns on the maybe portion of your assets. Remember: maybe you'll make money, maybe you won't. How much of your retirement money is safe? In retirement you will need to generate income with safety to preserve your principal. Guaranteed money as a portion of your assets will give you both.
Consider a hypothetical example the Rule of 100. If you were 60 years old, you should already have 60% of your assets in guaranteed money and the remaining balance of 40% in maybe money such as stocks, bonds, real estate investment trusts (REITs), mutual funds, variable annuities, and precious metals such as gold. As you get older, you should be transferring more of your assets to a fixed or fixed-indexed annuity to preserve your assets and generate an income to provide for you and your family while avoiding the risk of a market decline.
If you're 40 years old, then 40% of your portfolio should be in guaranteed money and the remaining balance of 60% in maybe money, just the opposite of above. This rule of thumb will help you to determine how much risk as an investor you should take at a specific age.
The simple analogy for the Rule of 100 is to use your present age as a percentage to determine how much of your principal should be used to purchase a fixed or fixed-indexed annuity. As always we recommend that you consult with a financial professional.
An example for the Rule of 100 for a 60-year-old:
1. Using the number 100, subtract 60, the present age of the person.
2. That number equals 40, leaving 40% to invest in the maybe money portion of your assets in equities.
3. The remaining amount equals 60.
4. Then you have 60% left to purchase a fixed or fixed-indexed annuity as the guaranteed money portion of your assets.
5. However, with Americans living longer, you need to make your money last longer. You may need the extra growth that equities may or may not provide. You may want to adjust the Rule of 100 to add 10% to equities if you are a risk taker and subtract 10% from equities if you are a conservative investor concerned about risk. Each person's situation may vary.
When you're approaching or in retirement, you should be looking at preserving what you have to take a safer approach as a way of providing an optional lifetime income stream. Using a safer approach for a portion of your portfolio in retirement will help ensure your money will last to and through your retirement, and it will be insured, and guaranteed with an option of a lifetime income stream. Know your risk tolerance and adjust your investments to where you're comfortable with the risk versus reward.
People will spend time learning how to program their iPhone or iPad or sitting in front of their computer but won't spend time planning for the most important event in their lives, their retirement.
The question isn't at what age I want to retire; it's at what income.
— George Foreman
The Dow Jones Industrial Average fell from its high of 14,164.43, reached on October 9, 2007, to 6,443.27 by March 6, 2009 — a 54% plunge in a little under eighteen months, causing the real estate bubble to burst. When the market has another correction — and it will — you want a greater part of your money in the guaranteed portion of your portfolio. If you experienced the two major market corrections in 2000 and 2008 and were like most people, it took several years to recovered from your losses. You know how stressful that was! Extremely devastating for people already in retirement. If you no longer have a paycheck and are withdrawing money from your retirement account, it may deplete your assets quickly. You don't want to go back to work just to support your lifestyle. If you treat your assets the same way you did when you were employed, it could have a major impact on your retirement.
